Look out below: Gold and silver mining stocks are getting annihilated following the announcement that career businessman Donald Trump will become our 45th president of the United States.
After initially surging to as high as $1,340 per ounce on the night of the election when it appeared Trump would pull off a stunning upset (at least based on what nearly every poll had suggested), physical gold now sits at $1,229 per ounce, down another $30 per ounce today. It easily marks one of the wildest swings we've seen in the gold market for years, and it's playing at the heartstrings of miners who rely on a strong gold and/or silver price to boost profitability. Here are some of the names getting creamed today:
- AngloGold Ashanti (NYSE:AU): down as much as 10%
- Yamana Gold (NYSE:AUY): down as much as 11%
- Golden Star Resources (NYSEMKT:GSS): down as much as 13%
- Silver Standard Resources (NASDAQ:SSRI): down as much as 14%
- Pan American Silver (NASDAQ:PAAS): down as much as 10%
- Great Panther Silver (NYSEMKT:GPL): down as much as 10%
Here's why gold and silver stocks are being crushed
What's going on?
For starters, there's the opinion among some pundits on Wall Street that Donald Trump's economic policy could favor growth and inflation, which isn't great news for precious metals that are often viewed as a safe-haven investment for slow growth and uncertain times. Trump has previously proposed massive infrastructure spending and energy independence from the rest of the world, which could signal that the U.S. GDP, and thus inflation, could rise, adding to the case for a strong U.S. economy.
Another key reason gold and silver miners, and the underlying metals, are being throttled is the growing expectation of a federal funds target hike by the Federal Reserve when it meets in December. Physical gold and silver have no dividend yield, thus they rely on low opportunity cost -- the act of switching from one near-guaranteed investment to another that offers the potential for greater rewards -- to thrive. If bank CDs, savings accounts, and Treasury bond yields remain low, investors may choose to pass them over in favor of gold and/or silver. However, if interest rates are hiked, those interest-based investments become a little more attractive, and it could be tougher for investors to pass them up.
Thirdly, we've seen a major exodus in the bond market since Trump was announced as the president-elect. Bond prices and bond yields have an inverse relationship, meaning if investors are selling bonds and pushing their prices lower, then yields are soaring. The 10-year U.S. Treasury bond is yielding 2.14% as of 2 p.m. EST, which is up 30 basis points from just 11 days earlier. Once again, higher yields mean a higher opportunity cost of owning gold or silver.
There's no reason to panic
On the other hand, and you'll have to excuse the bias in here, as I do invest within the precious-metal mining industry, the dismal two-day performance doesn't look like a reason to worry. In fact, it could present a marquee buying opportunity for patient investors.
To begin with, we have to look at interest rates in a bigger context. Even if the Fed raises interest rates in December, its target rate will still be 0.5% to 0.75%, which is well below the current inflation rate. Presumably, the rally the in Treasury bonds ahead of the December rate hike will have factored this in already. Though a rate hike would indeed raise the opportunity cost of owning gold or silver as opposed to an interest-bearing asset, many of these interest-based assets would still be losing real money to the inflation rate, or at best, making fractions of a penny on the dollar. The case for owning gold and silver, and the underlying mining companies, remains strong.
Secondly, there's still enough uncertainty to fuel precious metal prices. Though president-elect Trump has proposed "yuge" spending packages, he'll also need to get them through a Republican Congress that traditionally opposes spending large amounts of money on infrastructure. Additionally, Trump and some members of the Republican Congress were at heads with one another during the campaign, implying that it may not be as easy as Trump thinks to get his proposals passed into law.
Supply and demand is another reason gold and silver stocks could still shine. The World Silver Survey 2016 from the Silver Institute showed that there have been significant physical surplus deficits over the past three years. With supply constrained and demand growing, the natural reaction of the price of a good (in this case, physical silver) should be to head higher.
These mining stocks have done a great job controlling costs
Perhaps the best reason not to panic is that the mining companies have positioned themselves for success by reducing their costs, emphasizing their highest-ore-grade projects, and using M&A to their advantage.
For example, Silver Standard Resources, Golden Star Resources, and Yamana Gold have been active on the M&A or collaborative front in order to further their businesses. Silver Standard Resources acquired Claude Resources in June, which added the Seabee Mine and Santoy Gap into the product mix. These mines should deliver 70,000+ ounces of gold per year and provide an immediate cash flow boost for Silver Standard Resources.
Golden Star Resources, on the other hand, forged a $150 million financing deal with Royal Gold in 2015. The deal allows Royal Gold to stream a percentage of Golden Star's mined gold from the Wasaa and Prestea underground mines. Given Golden Star's lack of capital at the time, it was a smart move for the company.
For Yamana, it meant going 50-50 with Agnico-Eagle Mines and acquiring the Canadian Malartic mine via a buyout of Osisko Mining in 2014. Yamana's half share of Canadian Malartic has added 222,543 ounces of gold to Yamana's coffers through the first nine months of 2016.
But, the real story here is just how impressively costs and/or debt have fallen for many of these miners.
- AngloGold Ashanti has cut its all-in sustaining costs (AISC) in the first half of 2016 by $13 per ounce, while also turning in a $52 million profit after losing $143 million last year through the first six months. One key for AngloGold was that it paid off about 30% of its outstanding debt last year, which has greatly improved its financial flexibility.
- In the case of Great Panther Silver, AISC per payable silver ounce declined by 8% to $11.97 during the third quarter. This follows Great Panther Silver's updated fiscal 2016 guidance in Q2 that saw its AISC forecast fall by a midpoint of $1 per silver equivalent ounce.
- The story has been the same for Pan American Silver, which during the second quarter (its Q3 report will be released next week), delivered a 22% reduction in AISC net of by-product credits per silver equivalent ounce from the prior-year period. The company also reduced its full-year cost guidance.
There are some intriguing names and potentially great values among this bunch. Though I'm partial to Silver Standard Resources, which is now trading at just six times next year's estimated cash flow per share and is a personal holding of mine, Yamana Gold and Great Panther Silver, which are both aggressively expanding their operations while keeping their costs reasonably low, could also be worth a serious look.